Edward J. DeMarco, acting director of the Federal Housing
Finance Agency, has been proceeding with his efforts to shrink
the two U.S.-owned companies in the absence of action from
Congress. Obama administration officials say they worry the
independent overseer may take actions that would conflict with
legislative efforts to build a new housing-finance structure.

“You can’t have a wind-down strategy and a transition that
doesn’t connect up to that long-term system that we have to
build for the American people,” Michael Stegman, counselor to
Treasury Secretary Jacob Lew on housing issues, said yesterday
at a Mortgage Bankers Association conference in Washington.

FHFA spokeswoman Denise Dunckel declined to comment.

White House officials are pushing for a Senate vote this
week on Watt, a Democratic congressman from North Carolina
tapped by Obama for the job in May. To date, Watt still hasn’t
attracted the 60 votes -- including five Republicans -- he would
need to overcome a Republican filibuster. Many Republicans
prefer DeMarco, whom they praise for his efforts to reduce
taxpayer expenditures on Fannie Mae and Freddie Mac.

“We do not have an exact vote count but we are working
hard to make sure there is adequate support for Mel Watt to be
confirmed,” National Economic Council Director Gene Sperling
said today during a conference call with reporters.

Sperling and other administration officials met Oct. 28
with housing industry representatives at the White House and
asked for their help finding the needed votes.

Broad Impact

A change of leadership at the FHFA could have a broad
impact on the mortgage market since Fannie Mae and Freddie Mac
currently back about two-thirds of new mortgages. The two
companies buy loans and package them into securities on which
they guarantee payments of principal and interest.

DeMarco, who says he is following a congressional mandate
to balance the interests of taxpayers and the mortgage market,
intends to gradually reduce the size of mortgages that Fannie
Mae and Freddie Mac are allowed to buy. He is also working to
shrink their purchases of loans on multifamily buildings and
raise the fees they charge to guarantee their securities.

His plan also includes creating a common securitization
platform that could be used by both companies and later by
private securitizers in a future system.

The plan “is entirely consistent with the administration’s
call for winding down Fannie and Freddie,” DeMarco said in a
briefing with reporters last week. Ultimately, DeMarco said, it
is up to Congress to dismantle the two government-sponsored
enterprises, which relied on $187.5 billion in taxpayer aid
after they were taken into conservatorship in 2008.

Elimination Bills

Bills eliminating Fannie Mae and Freddie Mac have been
introduced in both the House and Senate this year. The expected
legislative vehicle for an overhaul is yet another bill being
drafted by the leaders of the Senate Banking Committee, Democrat
Tim Johnson of South Dakota and Republican Mike Crapo of Idaho.
The measure, which could be introduced by the end of the year,
is expected to include a role for the federal government as a
reinsurer of mortgages behind private capital.

Watt, if confirmed to run FHFA, would “take some time to
map out what a coherent transition plan looks like,” James
Parrott, a former adviser to Obama on housing issues, said at
the Mortgage Bankers Association conference.

The White House is getting lobbying help from some housing
industry participants who have complained about DeMarco’s plans
to reduce Fannie Mae and Freddie Mac’s footprint as soon as next
year. The National Association of Home Builders sent a letter on
Oct. 28 to Senate leaders urging a vote.

‘Much-Needed Certainty’

“The confirmation of Representative Mel Watt will bring
much-needed certainty to the U.S. housing finance system as we
transition from the current state of conservatorship to a new
and stronger system of housing finance,” the letter said.

Meanwhile, DeMarco has many supporters in the Senate,
particularly among the Republicans whose votes would be
necessary to confirm Watt as his replacement.

“I think that Mr. DeMarco has done a nice job in a tough
situation and I’ve met with Mr. Watt and I’ve just been
concerned about him changing direction and putting us back in a
situation where there’s more risk involved at the GSEs,” Ohio
Republican Rob Portman said in an interview. “Plus there’s an
ongoing legislative effort to reform the GSEs and I want to be
sure that whoever is there will be able to work with our
legislators here.”